Re: [Marxism] Answering 6 questions on the economic collapse

["Joaquin Bustelo" <jbustelo@xxxxxxxxx>]

Louis quotes at us from an interview: "But CDSs are not exactly like
insurance policies-you do not have to own the asset in order to take out
insurance against it."

I've been told by a person from Latin America involved in the financial
sector as a principal in a small investment firm, and who says he has had a
few hairs singed, but suffered no real burns, from some of these credit
default swaps, that some have come before bankruptcy judges in Delaware, and
that the emerging case law there has been that if you have no claim on the
assets, if you suffered no real loss, then your claim is a private gambling
debt that is not enforceable in court as a matter of public policy on the
state level, and as a matter of law on the federal level.

For some weird reason having to do with tax codes or something, many big US
corporations are incorporated in Delaware, and there's a whole section of
the judiciary of the state specialized in handling bankruptcies and other
disputes between corporations that not only are the size of dinosaurs, but
also have dinosaur brains to boot. I think in between the filing fees and
interest on escrow account deposits, Delaware is doing this as a business,
but I'm not quite sure. Anyways, all the bourgeois corporate lawyers swear
by Delaware having jurisdiction.

If my source is right, basically, what is involved in the emerging case law
is the same reason you can't buy even perfectly legal lottery tickets in the
United States with a credit card, or even a check, only with cash. Gambling
debts are not enforceable in court. Which won't stop some Don Corleone from
making you an offer you can't refuse, but it does mean almost certainly the
offer won't be backed by aircraft carriers and nuclear weapons, the armed
might of the bourgeois state, as ordinary debt collection is, but only a
couple of thugs twice as big as you are.

That is ALSO why it is impossible for markets to price these "derivative"
obligations. 

Because it's one thing for the First Pirate Bank of America to send Lucco
Bracci over to tell you you'd better pay up, when you already have the
equivalent of a light infantry company on the payroll, as well as a few
friends in the CIA rendition program, to deal with just such a contingency. 

It's quite another when some bumbling skinny white kid shoves a piece of
paper into your hand, gently asking you to "show cause," when you know
behind that kid stand a few hundred ICBM's fully armed with thermonuclear
weapons, in other words, the armed might of the bourgeois state, which gives
it a monopoly of violence, or at least a monopoly of violence once it gets
to a certain level on a certain turf, like the one you operate on. 

Those imply  two very different valuations of one and the same derivatives
contract, and to properly price it, the market needs some ground rules, some
idea of which of these two very different conditions will apply. 

Up until recently the rules were that no one was supposed to notice the
lunacy of stark raving mad, howling at the moon contracts that said Lehman
Bros. would pay you three and a half times the U.S. national debt if Chase
was even a minute late paying a $25 parking fine. Then after Paulson left
Lehman brothers twisting in the wind for vultures to pick over, it must be
admitted that *some* doubt did arise about whether Lehman would actually pay
you the $35 trillion they owed you, and not just because Lehman was broke,
but preponderatingly because it was dead. Which immediately led everyone in
the financial industry assuming each and every counterparty had --or could
have-- lots or at least some of these Lehman-style derivative contracts
among their "assets." 

Since these are firms that hold their cards close to their chest, no one
knows which ones hold "toxic" debt or how much, so banks did the logical
thing and stopped lending to each other or anyone else

These are, on their face, patently absurd and unenforceable contracts.
Unenforceable not just in the sense of "unconscionable" or "contrary to
public policy" and so on, but in the sense of --when looked at
collectively-- simply impossible, absurd on their OWN terms. 

You can sign a contract promising to fly into the sky and go 100 miles
without stopping if it turns out the sun rises in the east tomorrow, but
EVEN an American court would hold it unenforceable under the "reasonable
man" rule, even if you were lucky enough that the court did not hold you in
contempt and throw you inn jail for bringing your "contract" before it in
the first place. 

As to the $63 trillion in debt-swap derivatives, I fully expect them all to
simply be fed into paper shredders as soon as the government finishes
nationalizing the financial system (and not just partially and not just
those firms which are technically "banks" or technically "bankrupt"),
although it is also possible that the form of the nationalization will be a
positive law enacted by Congress and signed by the president declaring these
contracts illegal and unenforceable, with the bankruptcy of financial firms,
their consolidation, recapitalization and reprivatization being done all in
one fell swoop over a weekend under the provisions of that law.

I guess it cannot be theoretically excluded that capitalist courts will hand
down judgments for absurd amounts totaling more than the US or world GDP,
and that cops will be found to serve the writs and try to enforce them, but
I'd be willing to bet a dollar or two on the proposition that, instead,
bourgeois law will universally hold that such contracts are enforceable only
to the extent of the actual loss suffered by a given party from a credit
default, and any sums beyond that are simply not enforceable. 

And I suspect this matter is going to be definitively settled very early in
the next administration, and in no uncertain terms, even if it means every
last hedge fund in Connecticut has to hold a bake sale to pay its February
phone bill. If you read between the lines --and sometimes not even-- of
what's being said in the Wall Street Journal and Bloomberg articles, the
idea that someone --in fact lots of someones-- are going to take hundreds of
billions of dollars in losses or more to put a stop to the financial crisis
is now generally accepted. Although "trillions" in stock market valuations
have "disappeared" and some of that may be real losses, in the sense that it
isn't money someone else made in a zero-sum game, the only REAL way to do it
is for the government to step in and "demonetize" currency (currency of a
certain sort), in this case derivative contracts. 

As for those who are rubbing their hands with glee expecting capitalism to
self-destruct due to blind bourgeois devotion to the sacredness of
contracts, I would verily recommend unto them the ninth beatitude: 

"Blessed are they who expect nothing, for they shall not be disappointed."

At this point, I would not be surprised, on the second if not the first
anniversary of this post, to be sitting in the very spot I am now in, and
given the coming deep recession, probably with the same computer and
monitor, but with the DOW at 10,000 or well above, discussing with Ruthless,
Louis and the rest of the comrades how the capitalists managed to evade once
again their inevitable doom in the 2007-2009 financial crisis. I'm even
going to predict one of the main lines of argument: it was Obama's fault
that they survived.

Joaquin


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